Temporary
Services, Inc., on behalf of themselves and all others similarly situated;
and Charleston Steel & Metal Company, on behalf of themselves and all
others similarly situated, Plaintiffs,

v.

American
International Group, Inc.; American Home Assurance Company; Commerce and
Industry Insurance Company; National Union Fire Insurance Company of
Pittsburgh, PA; and American International Underwriters Corporation, Defendants.

ON CERTIFICATION FROM THE UNITED STATES
DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA

CHIEF JUSTICE TOAL: In
this matter, the United States District Court for the District of South
Carolina has certified two questions regarding the applicability of the filed
rate doctrine to Plaintiffs' claims.

Facts/Procedural Background

The underlying lawsuit was filed by
Temporary Services, Inc. and Charleston Steel and Metal Company (Plaintiffs)
against American International Group, Inc., Commerce and Industry Insurance
Company, and American Home Assurance Company (Defendants). Plaintiffs have
asserted seven claims of breach of contract against Defendants stemming from
workers' compensation insurance policies procured by Plaintiffs from
Defendants. Plaintiffs allege that Defendants have committed material breaches
of these policies by fraudulently charging excessive premiums.

In
determining the rates applicable to insurance policies, carriers utilize a
calculation based on a combination of two criteria: a pure loss component (LC)
and an expense component, or loss cost multiplier (LCM). The LC is an
industry-wide calculation of projected claims as to each specific job description.
The LCM is a multiplier applied to the premium rate based on an insurer's
specific expenses. The expenses relevant to the LCM include items such as
acquisition costs, overhead, taxes, and profit. S.C. Code Ann. § 38-73-1400
(2002). Plaintiffs allege Defendants fraudulently calculated their LCM, which
was submitted to the Department of Insurance (DOI) in 2001, in order to charge
excessively high premiums.

The questions certified to this Court concern how, if at all, the
Filed Rate Doctrine applies to Plaintiffs' claims. The Filed Rate Doctrine was
adopted by this Court in the case of Edge v. State Farm Mutual Insurance
Company, 366 S.C. 511, 623 S.E.2d 387 (2005), and "was originally a
federal preemption rule which provided that rates duly adopted by a regulatory
agency are not subject to collateral attack in court."

Issues

The United States District Court for the District of
South Carolina has certified the following two questions to this Court:

I.

Under South Carolina law, were the Defendants'
submissions to the DOI in 2001 "filed rates" within the
meaning of the Filed Rate Doctrine as adopted by this Court in Edge?

II.

Does South Carolina recognize an exception to the
Filed Rate Doctrine that permits a private plaintiff to avoid the
Filed Rate Doctrine by alleging that regulatory approval for the
rate was obtained through fraudulent means, or must a private
plaintiff seek remedies solely through administrative channels?

Law/Analysis

I. Applicability
of Filed Rate Doctrine to Plaintiffs' Claims

Plaintiffs argue the Filed Rate Doctrine does not bar its claims.
We agree.

The Filed Rate Doctrine "stands for the proposition that
because an administrative agency is vested with the authority to determine what
rate is just and reasonable, courts should not adjudicate what a reasonable
rate might be in a collateral lawsuit." Edge, 366 S.C. at 517, 623
S.E.2d at 391 (quoting Amundson & Assocs. Art Studio v. Nat'l Council on
Comp. Ins., 988 P.2d 1208, 1213 (1999)). The DOI was not vested with the
authority to determine the rates applicable to the workers' compensation
policies at issue, thus the Filed Rate Doctrine does not bar Plaintiffs' claims
in this instance.

A brief examination of the regulatory scheme applicable to
workers' compensation policies provides the necessary context to understand the
issues before this Court. Generally, the DOI is vested with the authority to
regulate the insurance industry. For regulatory purposes, there are three
categories of workers' compensation insurance that employers can maintain:
self-insurance, assigned risk insurance, and voluntary insurance. The workers'
compensation insurance at issue is voluntary insurance.

Each category of workers' compensation insurance is regulated in a
different manner by the DOI. An examination of the regulatory scheme
applicable to the self-insurance category is irrelevant to our understanding of
the issues before the Court. However, an understanding of the regulation of
assigned risk insurance and voluntary insurance is necessary to properly
contextualize the Federal Court's certified questions.

Generally, those employers participating in the assigned risk
program are high-risk insureds that were unable to procure insurance in the
open market. In contrast, those employers participating in the voluntary
program were able to acquire insurance on the open market. The differences in
the nature of these programs are reflected in their
respective regulation. In 1989, the General Assembly established a rating
system for the assigned risk insurance and voluntary insurance programs. As
briefly explained before, the rates in both programs are calculated by the use
of two categories of data: the LC and the LCM.[1]
The LC is derived by the National Council of Compensation Insurers (NCCI) and
submitted to the DOI for approval. The LCM differs from the LC in that it is
not industry wide or calculated by a rating agency but is carrier-specific and
calculated using figures for expenses and profits each individual carrier
incurs in the market.

Beginning in 1990, the DOI differentiated between the voluntary
and assigned risk programs as to how the "expense component," or LCM,
would be developed and who would file this information. Section 38-73-1380
provides for the LCM to be "filed with the department and approved by the
director or his designee, by each member or subscriber of a rating organization
independently." The DOI, however, utilized the discretion given to it
under section 38-73-1430 to mandate that the rating organization

file a proposed expense component for the Assigned Risk Plan
reflecting the cost of the Assigned Risk Plan only, which, when approved, will
be added to the approved pure loss component for the Assigned Risk Plan to
become the final rate for the Plan.

Department of
Insurance Bulletin No. 1990-05.

Thus,
after the inception of the rating system in 1990, workers' compensation
insurance rates were to be established uniformly throughout the assigned risk
program. In contrast, however, insurers in the voluntary program market relied
on rating agencies for the LC used in calculating their rates, but developed
and filed their own LCM. The Administrative Law Court recognized this change
by stating that "[e]ach carrier determines its own final rates in the
voluntary program by combining its own expenses with the loss costs." NCCI
v. SCDOI, et. al., 05-ALJ-09-0355-CC (S.C. Admin L. Ct. 2005) (http://www.scalc.net/decisions.aspx?q=4&id=8127#_ftn1)
(last visited June 2, 2010). Nonetheless, within its bulletin establishing a
two-tiered rating system, the DOI mandated that all insurers filing proposed
LCM figures, including those in the voluntary insurance market, "shall
include the necessary information required by 'SCID Form No. 2007,' … and all
data necessary to support the filing." Department of Insurance Bulletin
No. 1990-05. These filings were subject to public hearing.

The
deregulation of the voluntary insurance program continued when, in 2000, the
General Assembly altered the filing and review requirements for workers'
compensation insurers seeking deviations from their previously-approved
premiums. The General Assembly introduced the definition of "exempt
commercial policies" to the rating scheme in 2000 Act No. 235. Exempt
commercial policies were defined as insurance contracts:

. . . for large commercial insureds where the total combined
premiums to be paid for these policies for one insured is greater than fifty
thousand dollars annually and as may be further provided for in regulation or
in bulletins issued by the director. Exempt commercial policies include all
property and casualty coverages except for commercial property and insurance
related to credit transaction written through financial institutions.

The General Assembly's recognition of a class of exempt commercial
policies abrogated the DOI's rate-making authority over the policies at issue.
Act No. 235 eliminated the subject policies from the public notice requirement
by specifically exempting them from the rate-making requirements of Title 38.
This exemption eliminated the instant policies from the requirement of public
notice given to consumers of a proposed rate increase and the fundamental
requirement that "[n]o insurer may make or issue a contract or policy
except in accordance with the filings which are in effect for the
insurer." Id. § 38-73-920.

Furthermore, this Court has recognized that "sellers of
exempt commercial policies are not required to file rate schedules and plans
with the [DOI]." Croft v. Old Republic, 365 S.C. 402, 410, 618
S.E.2d 909, 913 (2005). Finally, the DOI has specifically noted that "no
insurer of exempt commercial policies will be required to file any
classification, rate, rule, or rating plan." S.C. Code Ann. Regs. § 69-64
(Supp. 2008). As argued by Plaintiffs, the DOI continued to require rating
agencies to file LC data with the DOI for its approval. However, beginning in
2000 with the advent of exempt commercial policies, the DOI was not vested with
the authority to regulate LCM.

The
filing at issue was made in 2001, a year after exempt commercial policies were
no longer subject to rate setting regulation by the DOI. All of policies at
issue were for large commercial insureds and carried premiums in excess of
$50,000, thus all were exempt commercial policies under both the original and
amended versions of the definition of this term. Therefore, because the submission
made by Defendants in 2001 did not invoke the regulatory authority of the DOI,
the Plaintiffs' claim against Defendants is not barred by the Filed Rate
Doctrine.

II. Exceptions to
the Filed Rate Doctrine

Plaintiff argues that, if the Filed Rate Doctrine applies in this
instance, their claims ought to fall within an exception to the Doctrine. Because
the Filed Rate Doctrine does not apply so as to bar Plaintiffs' claims, we
decline to answer the second certified question.

Conclusion

In addressing the issues before us, we make no
judgments regarding the merits of Plaintiffs' underlying claims. We answer the
questions narrowly, finding that because the workers' compensation policies at
issue were exempt commercial policies, Defendants' submissions to the DOI in
2001 did not invoke the regulatory authority of the DOI and the Filed Rate
Doctrine does not bar Plaintiffs' claims. Thus, the Court need not address the
Federal Court's second certified question.

[1] The "pure loss component," which is another term for LC, is comprised
of:

[t]hat portion of the final rate or
premium charge applicable to calendar/accident year incurred losses (the sum of
paid losses plus loss reserves including incurred but not reported loss
reserves) and loss adjustment expense (those expenses directly related to the
payment of claims) in this State, trended to include both the past and
prospective loss experience.

S.C. Code Ann. § 38-73-1400(1).

The "expense component," which is another
term for LCM, is comprised of:

that portion of the final rate or
premium charge applicable to production costs (including commissions and other
acquisition expenses), underwriting costs, administrative costs (including the
actual costs of taxes, licenses and fees), and profit margin in this State.